Customers will only benefit when extending matching adjustments (MA) to allow in-payment income protection (IP) liabilities under new Solvency UK rules is made accessible to smaller insurers, “spurring price competition rather than fattening margins.”
This is according to Julian Ellacott, chief actuary at National Friendly, who along with a number of other leading insurers spoke to Health & Protection following a Prudential Regulation Authority (PRA) proposal to extend MA eligibility to allow in-payment income protection liabilities and the guaranteed element of with-profits annuities.
In February 2022 HM Treasury revealed plans to slash Solvency II requirements for insurers that dictate how much capital they must hold and the types of assets they can use.
The proposed Solvency II reforms were developed by Treasury alongside the PRA.
They included a substantial reduction in the risk margin for insurers, including a cut of around 60-70% for long-term life insurers.
It was also revealed at the time that income protection and products that insure against morbidity risk will be included as liabilities eligible for the matching adjustment.
And in its consultation paper Review of Solvency II: Reform of the Matching Adjustment released late last month the PRA said its proposal to extend MA eligibility to allow in-payment income protection liabilities and the guaranteed element of with-profits annuities “would encourage firms to cover these liability cash flows with appropriately matched assets, improving the security of policyholder claims.”
The PRA said it “would also allow firms to deploy capital more efficiently without giving rise to prudential risks, thereby improving their competitiveness.”
While Ellacott conceded it made sense for the MA to be widened to include other products, he added: “This will only benefit those privileged companies in the industry who are able to afford the time and expense of getting matching adjustment approval.
“Customers will only benefit when matching adjustment is made accessible to smaller insurers, spurring price competition rather than fattening margins,” he added.
Reviewing proposals
When contacted, another mutual – Cirencester Friendly – said it was aware of the consultation and will work with the Society’s actuary and investment manager to consider whether the proposals would be worthwhile for its members.
“As a provider of income protection (IP) policies (including Holloway contracts) we are seeking clarification from the PRA on a number of points around in-payment IP liabilities that will inform our discussions,” it added.
Aviva said it was reviewing the proposals.
A spokesperson for the insurer said: “The proposals to widen liability eligibility for the Matching Adjustment under Solvency UK are part of a wider package of reforms that the PRA is currently consulting on, with the final rules following the consultation not likely to take effect until mid-2024.
“We are currently reviewing the proposals and are therefore not yet in a position to comment.”
LV= welcomed the consultation.
It said: “We note the key changes that are proposed in relation to widening asset and liability eligibility, as well as the other proposals it contains.
“We will be considering these in detail to understand the impacts and opportunities these changes would create for our business, and will be engaging in the consultation process.”
A Zurich spokesperson said: “We continually monitor and review our solvency and strategy in the light of all ongoing developments including regulatory updates.
“We continue to be committed to ensuring ZAL’s financial strength and stability for the protection of our customers, further enhanced by our belonging to the global Zurich group.”
Royal London said it was working through the PRA consultation paper issued and the implications of the change in regulations.
Finally, Scottish Friendly said: “We welcome the efforts by the PRA to engage with the industry to understand how these proposals can unlock productive investment, while keeping customer security at the heart of the regulatory regime.”
